An End to Fuel Subsidies: Do As I Say, Not As I Do?

by Charles Krakoff on September 24, 2009

in Climate and Development, Economic Reform, Economics, Free Markets, poverty

President Obama, hosting the G20 meetings that kick off today in Pittsburgh, has asked Indonesian President Susilo Bambang Yudhoyono to deliver a presentation on his country’s elimination of fuel price subsidies, replacing them with needs-based grants to poor consumers. The U.S. estimates that if developing countries were to follow Indonesia’s example they could reduce fossil fuel emissions by 12%. The question is whether President Obama is willing to follow his own advice.

According to the International Energy Agency, the biggest developing countries spend over $300 billion a year to keep the price of gasoline, diesel, kerosene, and bottled gas artificially low. In developing countries, these subsidies matter a great deal to poor households that need kerosene and gas for lighting and cooking, and to taxi drivers and other small business operators who depend on affordable gasoline and diesel. In Nigeria, taxi and motorcycle delivery drivers will wait for hours – sometimes days – to buy gasoline at the official price, while those who have the means to pay the market price jump to the head of the queue. Threats to reduce or eliminate subsidies can bring tens of thousands of people into the streets and threaten to topple governments. One Indian energy expert, quoted in The Financial Times, says that phasing out fuel subsidies is “an extremely long shot. It’s politically absolutely non-feasible.”

The United States is just as addicted to fossil fuel subsidies as India or China, Iran, or South Africa, which are among the countries that offer the biggest subsidies. But in the United States, as much as motorists grumble about the pump price of gasoline, the main beneficiaries are in the energy industry itself. Much fanfare has been raised about the Obama Administration’s subsidies and grants for alternative energy, but according to a recent report by the Environmental Law Institute,  from 2002 to 2008 the U.S. Government spent over $72 billion in subsidies for fossil fuels, mainly in the form of tax breaks and reduced lease payments – though cash grants amounted to more than $15 billion –  versus only $29 billion for alternative energy. But more than half of that $29 billion, or $16 billion, went to subsidize corn-based ethanol, not a fossil fuel but as big an emitter of greenhouse gases as gasoline.

Fuel subsidies are bad for the environment, it goes without saying, but they are bad fiscal policy as well. In the United States and other northern countries, it makes sense to help poor people buy heating oil or gas to get through the long, cold winters, but this can be done by means of cash grants, fuel vouchers, or tax credits. It doesn’t require that all consumers – and the producers too – also get subsidies from the taxpayer.

I would love to see India, China and the rest agree to phase out blanket fuel subsidies in favor of targeted assistance to the poor. I would love to see the United States do the same. I wonder which, if any, of these countries will take the plunge. My money is not on the U.S.

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